Budget 2016: Canada’s fiscal policy takes a dramatic turn

The federal Liberal government has focused new spending on priority areas that it believes will strengthen the middle class, create jobs and grow the economy. Front and centre in this approach is the government’s plan to invest $120 billion in infrastructure over the next 10 years. (Albeit with only $11.9 billion allocated for the first five years as issues related to municipal and provincial roles, delivery vehicles, project selection and other questions are resolved. This is a prime time to be reaching out with thought leadership and helping government shape policy in such a way as to effectively lever private investment.)

The government is counting on this funding to deliver results in a number of key areas, including:

Advancing major transit infrastructure projects in provinces, based on ridership levels

Promoting and helping to build a cleaner economy

Modernizing infrastructure to address the impact of climate change, and

Increasing the availability of affordable housing.

Perhaps most importantly, the government is counting on these infrastructure investments to create jobs that can support its stated priority of helping the middle class. In an effort to help bolster its claim to be defenders of the middle class, the 2016 Budget also re-announced steps that the government has already taken to reduce personal income tax levels for those in the middle class, while increasing income tax levels for those making more than $200,000 per year.

The government has also made it clear that funding for First Nations and Indigenous communities is a priority by committing $8.4 billion over five years. Almost half of these funds will go towards improving schools and education on reserves, with water and energy infrastructure also noted as priorities.

Finally, the federal government has chosen to replace the various existing programs and tax credits that benefitted families with a new Canada Child Benefit, which the government claims will provide the vast majority of Canadians with more generous benefits, and address poverty reduction efforts.

Politics Behind the Budget

Today’s budget set out to accomplish three sequential objectives: 1) maintain the Trudeau government’s positive, welcoming stance in the eyes of Canadians; 2) by fulfilling key campaign commitments; 3) within a difficult economic context that calls for new public policy measures. The result is a budget that dramatically changes Canada’s fiscal policy, perhaps even more than we might expect for a debut Liberal effort, following 10 years of Conservative government.

The Trudeau government’s core priorities have been at times difficult to distinguish amidst the warm glow of the Prime Minister’s “sunny ways”. His preoccupation has been building relationships by opening closed doors — to provinces and cities, First Nations, the U.S. Administration, and the United Nations. This relationship building has supported his key political objective, which is to deliver a positive and inviting version of federal politics to the three million new voters who made up more than 40 percent of his 2015 vote, and whose continuing engagement is mission-critical for the Trudeau government.

Maintaining the enthusiasm of this major voting bloc is the principal political goal of the Budget, even more than addressing the needs of this or that particular constituency. This is the critical measure by which the Government’s strategists will rate today’s performance.

Budgets are famously known for being where the political rubber meets the public policy road. Close observation is centred, however, on the out-year fiscal framework, in which reductions and reallocation from existing commitments must necessarily be made to make room for the new ones. It is in this space — where firm “no’s” must be given — that the government’s‎ sunny ways will encounter their first shadows.

‎Beyond the promise-fulfillment and associated trade-offs looms another larger challenge: Canada’s sputtering economic performance has begun to take hold as a nearly-intractable problem, defying the attempts of successive governments to address it. The heart of the problem, the country’s weak productivity growth, is rapidly moving up the national agenda. What remains to be seen is whether the government’s new fiscal approach will help address this weakness.

On the whole, the Government’s budget today is unlikely to disrupt severely Trudeau’s current political flight. The real question is where it will all land and whether the public policy departures begun today will take the Trudeau government to its desired destination of re-election in 2019. It’s too soon to tell.

Canada’s Fiscal Outlook

The federal government is projecting a deficit of $29.4B in 2016/17, up from a projected deficit of $5.4B in 15/16. The deficit is expected to remain in double digits for the foreseeable future, topping out this year and declining to $14.3B by 2020/21.

While the key to these deficits is increased program spending (up $20.5B to $291.4B) revenue is expected to be down $3.5B from last year, mostly as a result of a drop in corporate tax revenues and reductions in income from crown agencies. Holding to the projected out-year deficits may be challenging as the government is projecting increased program spending of only $13.2B, $2.1B, $5.5B and $9B in the successive outyears.

The government’s private sector economists summary shows an anticipated drop in Real GDP of 1.4% this year, off from 2% in its Fall Update and a drop in 2016 anticipated GDP Inflation from 2.1% the Fall Update to 1% in the Budget.

Opposition Reaction

The Conservative Party of Canada focused their criticism of the budget on the $29.4 B deficit projection. CPC Interim Leader Rona Ambrose characterized that deficit as a “nightmare scenario for taxpayers who will be forced to pick up the tab for today’s Liberal spending spree.”

The New Democrats also reacted negatively to the budget, claiming that it was a missed opportunity to tackle inequality and that the Liberals backtracked on key commitments. NDP Leader Tom Mulcair specifically highlighted the lack of action on: Employment Insurance eligibility, tax loopholes for big businesses, funding for First Nations education and welfare programs, funding for health care, and improved home care access.

Infrastructure: The Liberal commitment of $120 billion over 10 years in infrastructure spending

Public Transit

852

1696

2548

Green Infrastructure

650

1154

1804

Social Infrastructure:

1166

1087

2253

Federal Public Infrastructure

412

589

1000

Innovation and Clean Growth Economy: the government has committed to taking action quickly and upholding Canada’s global commitments related to GHG reduction

Science and Research Spending

853

1408

2261

Business Growth and Innovation

137

197

334

Clean Technology Investment

51

350

401

Environment

333

1413

1746

Jobs and Prosperity for the Middle Class: This government is committed to growing the middle class by providing opportunities and support for those who are in need in order for them to participate fully in the economy